Risk assessment

Activity driven by external trade and private consumption

In 2018, growth is expected to remain moderate, driven, in particular, by robust external trade and private consumption. The latter should increase thanks to higher remittances from expatriate workers, boosted by US growth. For the same reason, manufacturing exports (especially textiles) are expected to climb, benefitting from preferential access to the US market. Inflation should be weaker in 2018, with an expected hike in the central bank’s key rates reversing the trend in place since 2013.

The political climate, marked by large-scale corruption scandals, could put pressure on investments. The first signs of this can already be observed in the suspension of many public infrastructure projects due to corruption allegations and frequently postponed or unsuccessful (lack of interested parties) calls for tender. The cessation at the end of 2017 of gold mining activities at the Marlin mine (Goldcorp), after many years of protest by local Mayan communities, will trigger a drop in gold production in the absence of other large-scale projects. Meanwhile, the suspension of activity by the Canadian company Tahoe at the Escobal silver mine, following a judgement by the Supreme Court for failing to respect the right of indigenous people to be consulted, will reduce silver production. Uncertainty as to whether activity will recover is likely to affect the business climate in general, and the country will be less attractive as a result. Rising silver prices internationally should, however, encourage the government to come to an agreement with Tahoe.

Fiscal revenues still too weak in the absence of reforms

Guatemala’s tax system is characterised by the lowest rates of the entire Latin American continent, restricting the resources available for public spending. The political context makes tax reforms in the immediate future unlikely. The cautious fiscal policy has been temporarily relaxed in a context of strong social protests. Social and capital spending is being prioritised to finance health and education infrastructures as is security spending to combat the high levels of crime. The public debt, on the weak side in relation to GDP, is substantial when compared to fiscal revenues, which represented only 11% of GDP in 2016.

Regarding external accounts, higher fuel prices will push up imports, while the appreciation of the Guatemalan quetzal will make textiles less competitive against production from Asia. The increased trade deficit is unlikely to be fully offset by higher remittances from expatriate workers; the current account balance is therefore expected to dip into the red in 2018.

A very tense political climate against a background of corruption

2017 was marked by an explosion of corruption inquiries involving President Jimmy Morales, elected under the slogan “Neither corrupt, nor a thief”, and several members of the Guatemalan political class. In September 2017, the parliament rejected calls to lift the immunity of President Morales, and in October 2017, the Supreme Court ruled against investigating the president for receiving a bonus from the armed forces. Institutional risk appears to be contained at the moment, but President Morales’s attempt to oust Iván Velásquez, the head of the UN Anti-corruption Commission, triggered huge protests. As a result, the Supreme Court invalidated the president’s decision, allowing M.Velásquez to continue his work. Popular pressure remains strong and President Morales’s future as leader of the country is still very uncertain, strongly increasing political risk in the country.

Meanwhile, the Guatemalan parliament is very fragmented. The president’s party has only 11 seats out of 158 and the other parties are numerous and small in size. In this context, it is impossible to get a parliamentary majority, making any large-scale reform very unlikely. Finally, Guatemala is characterised by very high crime rates. This – on top of ineffective institutions, lack of reforms and high levels of corruption – puts considerable pressure on the business climate.